Commercial Book-Entry Regulations (TRADES)

Overview

All new offerings of U.S. Treasury bills, notes, and bonds are issued only in book-entry form, which means that physical certificates are not issued.

Investors have three book-entry options for holding U.S. Treasury securities:

Legacy Treasury Direct

TreasuryDirect

The Treasury/Reserve Automated Debt Entry System "TRADES," also known as the commercial book-entry system

Legacy Treasury Direct and TreasuryDirect are systems established for investors who want to hold their Treasury securities directly with Treasury.

The commercial book-entry system is a tiered system in which an investor's ownership of securities is reflected only on the records of the institution (e.g., broker-dealer) where the investor maintains his or her securities account. The institution maintains its account at a depository institution or a Federal Reserve Bank.

Legacy Treasury Direct and TreasuryDirect Systems

Legacy Treasury Direct and TreasuryDirect are two systems for holding book-entry Treasury securities. An investor's Legacy Treasury Direct or TreasuryDirect securities account is maintained directly with the Treasury. The Treasury issues a statement of account, evidencing ownership, to the investor. Thus, unlike Treasury securities held in the commercial book-entry system, Treasury knows the identity of the ultimate holder of the securities held in Legacy Treasury Direct and TreasuryDirect systems.

Commercial Book-Entry System

Securities held in the commercial book-entry system are maintained in the accounts of depository institutions (participant's securities account) at the various Federal Reserve Banks. These depository institutions, in turn, maintain accounts for their customers (securities intermediaries), which may include other financial institutions, broker-dealers, and individuals.

The financial institutions and broker-dealers who have accounts at these depository institutions also maintain securities accounts for individual investors (entitlement holders). An individual investor's ownership of securities is only reflected on the records of the institution where the investor maintains his or her securities account. Such an institution would maintain an account at its depository institution or Federal Reserve Bank that would include the securities accounts of other customers.

For Treasury securities held in the commercial book-entry system, the Treasury expects that settlement of any Treasury security transactions or disputes would occur between the institution maintaining the customer's account and the customer. This is because neither the Treasury nor the Federal Reserve Banks maintain ownership records for individual customers of book-entry securities held in the commercial book-entry system. Individual customers, whose Treasury securities are maintained in the commercial book-entry system, have no direct recourse against the U.S. Department of the Treasury or the Federal Reserve Bank.

As in any financial transaction, investors should exercise care in selecting a book-entry custodian or a broker-dealer.

Treasury/Reserve Automated Debt Entry System "TRADES" Regulations

On August 23, 1996, we issued a final rule governing securities held in the commercial book-entry system or the Treasury/Reserve Automated Debt Entry System (TRADES).

The TRADES regulations are based on Revised Article 8, dealing with Investment Securities, of the Uniform Commercial Code (UCC) (referred to as Revised Article 8).

In issuing the TRADES regulations, we did not preempt state law for those states that have adopted a version of Article 8 of the UCC that is substantially identical to Revised Article 8.

Security Entitlements

The TRADES regulations reflect a distinction between holdings of securities at Federal Reserve Banks and holdings at Securities Intermediaries other than Federal Reserve Banks.

The rights and property interests associated with a Security Entitlement of a Participant held on the books of a Federal Reserve Bank are different from other security entitlements, as provided in 31 CFR 357.2.

As provided in Section 357.10(a) of the TRADES regulations, federal law defines the scope and nature of a Participant's Security Entitlement.

The meaning of Security Entitlement under federal law is thus different from that under Revised Article 8.

However, to the extent not inconsistent with the TRADES regulations, the scope and nature of a Security Entitlement of an Entitlement Holder below the level of a Participant is defined by applicable state law, as determined pursuant to Section 357.1 of the TRADES regulations.

Choice of Law

The TRADES regulations specify the law that governs the rights and obligations of persons maintaining securities accounts at the Federal Reserve Banks, as well as the United States and the Federal Reserve Banks.

These rights and obligations are governed by Treasury regulations, including the TRADES regulations and Uniform Offering Circular, the offering announcement, and Federal Reserve Bank Operating Circulars.

In contrast to holdings of securities at the Federal Reserve Bank level, the regulations also provide that the choice of law for persons holding interests in Treasury securities at levels below the level of persons maintaining Participant's Securities Accounts, will be state law if the state has adopted a version of Article 8 that is substantially identical to Revised Article 8.

If the applicable state has not adopted Revised Article 8, then the law is the law of that state, as though Revised Article 8 had been adopted by that state.

State Adoptions of Versions of Article 8

States which had adopted versions of Revised Article 8 that we determined were "substantially identical" to the uniform version for purposes of the regulations are noted in TRADES regulations and subsequent Federal Register Notices.

Government-Sponsored Enterprises

A government-sponsored enterprise "GSE" is a privately owned, publicly chartered entity that is created by Congress to reduce the cost of capital to key sectors of the economy.

A number of government-sponsored enterprises have adopted regulations essentially identical to the TRADES regulations for the securities maintained in the Federal Reserve Book-Entry System.

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